Capitalism in its imperialist phase is a decaying and parasitic system. It is a global system of national oppression and of financial strangulation of the overwhelming majority of the world by a small number of imperialist countries. The needs of millions of human beings are brushed aside as multinational corporations, banks and rich investors seek whatever means are available to augment their profits and wealth. The book Treasure Islands dramatically exposes some of the secretive, devious and corrupt mechanisms now employed to achieve these ends.

The book is about tax havens, an offshore system which, Shaxson informs us, ‘connects the criminal underworld with the financial elite, the diplomatic and intelligence establishments with multinational companies’ (p7).1 The offshore system is pivotal to today’s crisis-ridden capitalism. More than half of world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of foreign direct investment by multinational corporations pass through the offshore system. 83 of the largest 100 US corporations and 99 of Europe’s 100 biggest companies use offshore subsidiaries. In 2008 Citigroup had 427 subsidiaries in tax havens and Barclays had 315 in 2009. Around 85% of international banking and bond issuance takes place in the Euromarket, a stateless offshore zone. In 2010 the IMF estimated that the balance sheets of small island financial centres amounted to $18 trillion, equivalent to nearly a third of the world’s GDP (p8). In 2005 wealthy individuals were estimated to hold around $11.5 trillion offshore.

The world’s tax havens

Shaxson provides a loose definition of a tax haven: ‘a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.’ Throughout the book he uses the term ‘secrecy jurisdiction’ interchangeably with ‘tax haven’. The defining characteristic of a secrecy jurisdiction is that local politics are captured by financial services interests (or sometimes criminals, and sometimes both) with meaningful opposition to offshore business eliminated (pp9-10). Later in the book after discussing the British Crown Dependency, Jersey and the US state of Delaware, he tells us that a tax haven can be seen as ‘a state captured by financial interests from elsewhere’ (p175).

There are around 60 secrecy jurisdictions roughly divided into three significant groups. The first is the European tax havens. Second, a British zone centred on the City of London which spans the world and loosely tracks Britain’s former empire. Third, a zone of influence focused on the United States. In addition, there are a few less successful havens outside these groups, such as Somalia and Uruguay, which are not discussed in the book.

The European tax havens got going properly during the First World War as governments raised taxes steeply to finance the war. Switzerland introduced a secrecy law in 1934 making it a criminal offence to violate banking confidentiality. Luxemburg, specialising in certain kinds of offshore corporations since 1929, is today among the world’s largest tax havens. The Netherlands is another major tax haven. In 2008 around $18 trillion passed through Dutch offshore entities, equivalent to 20 times Dutch GDP. In addition, Liechtenstein, Monaco, Andorra and Madeira are all active tax havens.

The second offshore group accounting for about half the world’s secrecy jurisdictions is, according to Shaxson, the most important. He calls it a ‘layered hub-and-spoke array of tax havens centred on the City of London’. The City’s offshore network consists of three main layers. Two inner rings: Britain’s Crown Dependencies of Jersey, Guernsey and the Isle of Man; and its Overseas Territories such as the Cayman Islands, Bermuda, the British Virgin Islands, the Turks and Caicos Islands and Gibraltar. These are substantially controlled by Britain, and Shaxson says ‘combine futuristic offshore finance with medieval politics’. The outer ring consists of a more diverse group of tax havens like Hong Kong, Singapore, the Bahamas, Dubai and Ireland, which are outside Britain’s direct control but have strong historical (former empire) and current links to Britain and the City of London.

This network of offshore satellites gives the City of London its global reach. Shaxson likens it to a spider’s web. Much of the money attracted to this web, and the business associated with handling it, is funnelled through to London. This spider’s web allows the City to get involved in activities that might be forbidden in Britain, providing sufficient distance for financiers in London, with some plausibility, to deny any wrongdoing.

In the mid-1950s, in contravention of existing exchange controls, the Midland Bank, now part of HSBC, began taking dollar deposits unrelated to commercial transactions, offering interest rates that were substantially higher than those allowed in the US. The Bank of England became aware of this in June 1955 and decided to take no action against Midland. The Bank of England refused to regulate this new unregulated dollar market in London and prevented other nations from doing so. Shaxson says that it was at this point that the modern offshore system really began. ‘The Euromarket, which has no physical embodiment in an exchange building or even a widely recognised set of rules and regulations, is the largest source of capital in the world’. There are no reserve requirements in the Euromarkets as is the case for ordinary bank lending. In 1963 the Eurobond market came into existence. The Euromarket grew rapidly from $46bn in 1970 to $500bn in 1980 and $2.6 trillion in 1988. The Euromarket is now so massive and all enveloping that its size is no longer measured separately. The City of London was to survive the loss of Britain’s formal empire by becoming an offshore centre for a large proportion of the world’s capital (pp87-98), taking the route that would see London regaining its position as the world’s leading financial centre.2 London has more foreign banks than any other financial centre. Financial services companies flock to London because of its light regulation compared to their home countries. In 2007 the IMF referred to Britain as an offshore jurisdiction because of the very large size of its financial services industry relative to the national economy.3

In 2007 Britain’s three Crown Dependencies held around $1 trillion assets. They channel very large amounts of finance into the City of London. In the second quarter of 2009, the UK received $332bn net financing from them. The Cayman Islands, population 55,000, is the world’s fifth largest offshore centre. 80,000 companies are registered there as are over three quarters of the world’s hedge funds. It holds around $1.9 trillion on deposit, four times as much as in New York City banks. The Caymans are effectively governed from London. The British Virgin Islands, population 25,000, hosts over 800,000 companies. A large quantity of foreign investment into China goes through the British Virgin Islands.

The fourth group of tax havens centres on the United States. Shaxson says that tax havens there have faced more political opposition than in Britain, where the City was able to neutralise domestic opposition. From the 1960s US financiers went offshore to avoid domestic rules and taxes, first to the offshore Euromarket in London and then into Britain’s spider’s web and beyond. This helped Wall Street to get around strong US financial regulations, and, according to Shaxson, progressively regain its influence over the US political system after the setbacks in the 1930s. From the 1980s onwards the US turned itself into one of the world’s most important tax havens in its own right. At the Federal level the US offers a range of tax exemptions, secrecy provisions and laws which attract foreign investors ‘in true offshore style’ (p19). By 2005 US banks were free to receive the proceeds of crime as long as the crime was committed outside the country. The next tier consists of individual US states which offer a range of inducements, such as Florida where Latin American elites do their banking. Smaller states such as Wyoming, Delaware and Nevada offer very low cost, unregulated corporate secrecy that has attracted large amounts of illicit money from around the world. Delaware is home to over half of US publicly-traded companies and nearly two-thirds of the Fortune 500 listed companies are incorporated there. The US’s third tier is an overseas satellite network and includes the US Virgin Islands, the Marshall Islands and Panama.

The global impact of tax havens

The offshore system is a network controlled by the major imperialist powers, prominently Britain and the US. Shaxson regards ‘the offshore world as the biggest force for shifting wealth and power from poor to rich in history’ (p28). Tax evasion, corporate trade mispricing, reinvoicing, corruption and direct looting of the wealth of developing countries drive this process, all hidden by an almost impenetrable wall of secrecy. A whole array of hired professionals – bankers, corporate officers, lawyers, and accountants – is complicit in this racket. Those who attempt to break this wall of secrecy have been threatened and intimidated and have lost their jobs and livelihood. There are also reports of mysterious offshore deaths (p224).

Tax havens allow corporations and wealthy investors to evade taxes on a massive scale. In 2007, a third of the largest 700 companies in the UK paid no corporation tax at all in the UK for the previous boom year. Barclays paid only £113m UK corporation tax in 2009, a year when it made record profits of £11.6bn. Corporation tax as a percentage of total tax has dramatically fallen in both the US and UK. Around $250bn in taxes is lost on just the income earned each year on the $11.5 trillion that wealthy investors hold offshore.

Around two-thirds of global cross-border trade takes place inside multinational companies. By artificially adjusting the price for internal transfer, multinationals can shift profits to low-tax havens and costs to high-tax countries where they are tax deductible. Developing countries lose around $160bn a year as a result of transfer pricing. It has been estimated that in 2006 developing countries lost $850bn-$1,000bn in illicit financial flows (commercial transactions, criminal money and bribes), losses that have been growing at 18% per year (p27).

Finally Shaxson argues that the global offshore system was one of the central factors that helped generate the latest financial and economic crisis. The secrecy jurisdictions, in particular the offshore Euromarkets, with their lax regulation, became hothouses for the shadow banking system and risky new banking products, contributing massively to the crisis of the world’s major economies (p189).

This book is highly recommended for its remarkable and courageous exposure of the offshore system. It will give anti-cuts and anti-capitalist protesters substantial material to counter the propaganda and misinformation about the public sector deficit, the banking crisis and the need to cut public services. But there are criticisms that must be made. The reforms to challenge the offshore system proposed at the end of his book show that Shaxson fails to appreciate the full measure of what we are fighting. This is not a system that has just lost its way or that can be reformed. To suggest, as he does, that it is not efficient for companies and capital to concentrate on tax avoidance instead of creating better and cheaper goods and services (p13) shows he has not understood the true character of capitalism. Capital is driven by the sole objective of expanding its profits. The offshore global system, tax havens, tax evasion, plunder and looting of the developing countries are the inevitable products of this relentless drive to expand capital. To rid ourselves of this reality we need to rid ourselves of the system that created it.

David Yaffe

1 All page numbers refer to Treasure Islands.

2 For an early discussion of the importance of the rapidly growing Euromarket for British imperialism see David Yaffe ‘Imperialism, National Oppression and the New Petit Bourgeoisie’ in Revolutionary Communist 9, June 1979. It is on our website www.revolutionarycommunist.org under Marxism, Imperialism.

3 For a discussion of Britain’s financial services industry see David Yaffe ‘Britain: parasitic and decaying capitalism’ in FRFI 194 December 2006/January 2007 on our website.